Question

What types of investment exist according to
Keynes's theory of the determination of
aggregate output? what is a major difference
between the two according to Keynes?

Answer 1

According to Keynes, two types of Investment exists-

1) Induced Investment- An investment influenced by expected profit or rising levels of income in the economy is termed as induced investment. The factors that affect profits such as prices, wages, and interest influence induced investment.

2) Autonomous Investment- Autonomous investment is not influenced by expected profitability of level of income and is an investment expenditure made by the government with a view of promoting the level of aggregate demand in the economy.

Major differences between Induced Investment and Autonomous Investment-

i) Induced Investment is income-elastic (i.e. rise in level of national income implies rise in level of investment) whereas Autonomous investment is income-elastic.

ii) Induced Investment is positively related to national income but Autonomous investment is unrelated to national income.

iii) Induced Investment is determined by consideration of profit, whereas Autonomous Investment is consideration of social welfare.